Financial management entails the process of efficient utilization of funds to ensure that a firm realizes an increase in both value and profit margin. In the realization of gains in profit and value, a financial manager is thus involved in both wealth and profit maximization. While both aspects of financial management are crucial in ensuring company success, wealth maximization tends to have a greater impact on the wellbeing of the company as will be discussed in this write-up. Wealth maximization entails the ability of a firm to continually increase the market value of its common stock (Ross, Westerfield, & Jordan, 2008). Market value can be evaluated through the quality of products, sales volumes, the services offered by the company and most important company goodwill. When wealth maximization and profit maximization are juxtaposed, elements of short term and long term benefits to an organization become crucial.
Profit is a basic necessity for any organization or firm since it ensures the continuity of company products and services. Wealth maximization entails focusing on cash flows, and not necessarily profit. In this case, therefore, decision-making relies on the analysis of the imminent risks as well as on cash flows. Wealth maximization tends to focus on the long-term well-being of an organization rather than on the short-term needs that include profit maximization. When a financial manager focuses on wealth management, he or she had to take to account the immediate environment in which an organization operates (Ross, Westerfield, & Jordan, 2008). This means being able to take into account the state of the economy, the political situation as well as the nature of the industry in which the firm operates. The most significant responsibility of a financial manager is thus tied to the ability to ensure that company objectives are in line with the trade-offs that come about due to a focus on immediate returns versus risks and more importantly addressing the long-term needs of an organization.
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References
Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance . Tata McGraw-Hill Education.
